A Growing Alliance

Supermarkets turn dirt farmers into rural entrepreneurs

Every day, in supermarkets around the world, a swelling army of consumers is transforming the global food industry.

The trend is known as "supermarketization" and its pace has been picking up over the past two decades. The process has already happened in industrialized nations, where one billion consumers make up the world's biggest market for fresh fruit and vegetables. The strongest growth is now taking place in developing countries, according to Thomas Reardon, a professor of agricultural economics at Michigan State University.

"The traditional image is that these countries have no middle class, that developing regions are populated by poor masses" Reardon said in a speech to Central American rural development specialists at a workshop held earlier this year in Guatemala City.

That picture is simply wrong, he added, since there are at least one billion people with middle class patterns of consumption in developing countries. Policymakers, development economists and practitioners should scrap the old-fashioned notion that supermarkets in developing countries cater only to tiny elites ensconced in rich suburbs.

In Central America, where poverty is highly concentrated in rural areas, it's crucial to weigh the economic and social implications of this shift from traditional markets to supermarkets, which are increasingly becoming the key link between consumers and farmers.

The Guatemala City workshop had been organized by multilateral agencies to discuss the potential impact of the CAFTA free trade agreement between the United States and Central America on the region's rural economies. The goal was to see how countries might take full advantage of the opportunities offered by free trade and alleviate its eventual costs. But Reardon gave his audience other facts to mull over.

"Everyone talks about exports, exports and more exports. And there certainly are interesting niches," he says. "But the fact is that supermarkets in Latin America buy 2.5 times more fruit and vegetables grown by local producers than what is actually exported to other regions."

Back in 1990, South American supermarkets were responsible for only 20 percent of retail food sales. By 2002 their share had risen to about 55 percent. Central American supermarkets started at even lower levels in 1990, between 5 and 10 percent of food retail sales. By 2002 they were up to 36 percent, according to Reardon and other researchers. And as supermarket chains expand and diversify their formats to accommodate clients with different income levels, they are capturing larger and larger segments of the population.

While the percentages of sales of fresh fruit and vegetables at supermarkets are still somewhat lower that those of overall food sales, they are following similar growth trends. Additionally, as they expand, supermarket chains tend to rely less on traditional wholesale markets for fresh fruit and vegetables. Many have opted for their own centralized distribution centers or establish "dedicated wholesalers" that serve only their stores. Nowadays, supermarket chains set their own quality and safety standards and build their own networks of "preferred suppliers"—growers who can deliver quality produce year-round.

At the vanguard of this trend is a Costa Rican firm, Hortifruti SA, Central America's leading marketer of fresh fruit and vegetables. Hortifruti is part of Corporación de Compañías Agroindustriales (CCA), whose other divisions deal with beef, pork, chicken, eggs, fish, baked goods and processed foods. CCA primarily supplies supermarkets owned by its parent, the Central American Retail Holding Company (CARHCO), a joint venture of Royal Ahold of the Netherlands, La Fragua of Guatemala and Corporación de Supermercados Unidos (CSU) of Costa Rica. It also sells to high-volume consumers such as hotels and catering services.

What sets Hortifruti apart from other dedicated wholesalers is how closely it works with its suppliers, which include micro, small and medium-size farmers in Costa Rica, Honduras and Nicaragua. Over the course of three decades Hortifruti has developed a formidable value chain that has helped hundreds of Central American farmers overcome many of the obstacles they routinely face in the field.

Among the myriad problems besetting producers in this region—besides the threat of natural disasters—are the scarcity of agricultural credit, outdated technologies, insufficient equipment, deficient public infrastructure, inadequate post-harvest management and, most notably, a lack of market information. As a consequence, they usually have low yields, uneven quality, poor sanitary conditions and limited means to organize their production to fit the needs of their buyers.

"Small farmers suffer great instability regarding market conditions for their production," said Aquileo Sánchez Víquez, director of corporate affairs of CSU-CCA. "For many of them, planting does not guarantee they'll harvest a crop, harvesting does not guarantee they'll sell their produce, selling does not guarantee they'll obtain a good price, and a good price does not guarantee they'll be paid promptly or in full."

"Hortifruti's model has been successful precisely because it has sought to eliminate those sources of instability for its suppliers, offering them a more predictable way of producing, which is the key to helping traditional farmers become rural entrepreneurs," he added.

Of Chains and Cornucopia

The model involves not only Hortifruti and farmers in the value chain but also government agencies, non-governmental organizations and bilateral cooperation agencies. Producers obtain technical assistance, access to modern farming technologies, information to schedule crops, food safety tests, supplier credit, reliable payments and opportunities to diversify their output and to grow with their buyer. As an example, Sánchez Víquez mentions the case of Javier Rojas, a Costa Rican farmer who has worked with Hortifruti for more than 15 years. Rojas, who started with 600 tomato plants, now delivers one million kilograms (about 2.2 million lbs) of tomatoes a month to Hortifruti.

Other striking cases can be found in the neighboring countries where Hortifruti has only been working for a few years. In Nicaragua, a group of producers in Ocotal who used to be subsistence farmers are now making an average of US$1,000 a month growing tomatoes. Another group in La Paz, Honduras, who used to grow only corn and beans, are receiving an average of US$6,500 a month for their potatoes.

In return for their efforts, Hortifruti and the CARHCO supermarket chains have built a network of suppliers who can reliably deliver produce that meets the retailer's expectations of quality and food safety. And since Hortifruti supplies almost all their fresh fruit and vegetables, they've largely cut out the middlemen. They also stabilize prices and reduce waste and losses that usually occur due to deficiencies in how fresh fruit and vegetables are handled after they are harvested. According to some researchers, these savings can be substantial enough to offset the cost advantage of traditional wholesale markets, where standards are far less rigorous.

Further integration of the Central American economies, a process that has advanced in fits and starts over the past couple of decades, could also give farmers more opportunities to specialize and expand their output for a broader regional market. Several of these countries have succeeded recently in establishing joint customs at border crossings, a bottleneck where produce shipments have traditionally run the risk of getting stuck for days. Yet another hurdle remains in place: national food safety and animal and plant health regulations have not been harmonized, and are frequently the source of periodic "produce wars" between these neighbors.

Hortifruti's experience proves that value chains can work for everyone involved: farmers, supermarkets and consumers. Hortifruti currently works with about 1,800 farmers in Costa Rica, Honduras and Nicaragua.

Naturally, there are also pitfalls and failures. Associations of small farmers can splinter due to internal disputes. Producers can have a hard time adapting to crop calendars, retailers' requisites or abrupt changes in market demand. And some won't reinvest earnings, missing chances to improve their operations. Reardon and other researchers also warn that the trend of supermarkets linking up with "preferred suppliers" can potentially exclude small farmers who lack the wherewithal to meet more exacting standards.

Room for More?

The potential payoff in terms of development of rural value chains has led donors such as the United States Agency for International Development to support programs in several Central American countries to help small-scale farmers become capable of supplying local, regional and foreign clients. The programs emphasize the transfer of modern production, post harvest handling and processing technologies, as well as the dissemination of information about business opportunities, with the goal of improving farm productivity, sales and profitability. In the year 2000, the U.S. agency launched a project in Honduras called Centro de Desarrollo de Agronegocios (Agribusiness Development Center), which is working with some 7,800 farmers in 15 departments who produce 50 different fresh and processed products. Over the past three years, their sales have totaled US$63 million. The smaller ones (those with sales under US$13,500 a year) have seen their revenues grow by an average 190 percent, said Andrew Medlicott, director for Latin America of Fintrac, the international agribusiness consulting firm implementing the CDA project. While the project's results speak for themselves, Medlicott cautioned that it is not a panacea for all that ails Central America's rural sector. "We work with people who want to do better and who are willing to make changes," he said in a presentation in Guatemala City. "People will adopt technologies if there is an incentive. Their neighbors will follow their example if they are successful."

Can these experiences be scaled up to involve many more among the vast number of Central American farmers who are still far from becoming supermarket suppliers or exporters?

"If by 'model' we mean efforts like Hortifruti's, in which supermarkets, along with other partners, establish sustained and mutually beneficial relationships with farmers, the short answer is 'absolutely,' " said IDB agricultural economist John Horton.

"The question is how to close the gap between supermarkets that want to develop new suppliers and farmers who are ill-equipped to meet the requirements and get their produce to the shelves," he added. "Yet buyers for the big chains consistently report that they would rather have a variety of medium-size suppliers than depend on a few large vendors."

Everyone would benefit if rural producers could turn their farms into efficiently managed businesses capable of fulfilling supermarket standards consistently. In turn, greater specialization and competitiveness would fuel significant growth in the rural economies. However, not all farmers have the potential to make the grade, and there are many pressing social needs competing for scarce public resources.

In Horton's view, this chicken-or-the-egg dilemma constitutes a classic "market failure." Many of the things Central America's rural economies need to become competitive are clearly public goods: basic infrastructure (roads, electricity, telecommunications) and social infrastructure (potable water, health care, schools). Plant and animal health regulations and food safety standards and enforcement mechanisms to protect consumers also depend on government services. But Hortifruti's experience raises the question of whether public resources should be used to help individuals become more successful entrepreneurs. The challenge stands: where to draw the line between activities that correspond to the public sphere and those that represent subsidies to private businesses.